The draft instrument clarifies section 71(8) of the SIS Act, which applies to an asset purchased by the trust of an SMSF using an LRBA.
“We have become aware of a number of issues regarding the application of the in-house asset exemption provided by subsection 71(8) of the SIS Act to an investment in a related trust held by a SMSF as a required part of a LRBA,” the ATO said.
Under the current rules, an asset purchased using an LRBA may be categorised as an in-house asset if borrowing arrangements are not yet in place and then again after any loan is repaid, SMSF Professionals' Association of Australia’s Graeme Colley told SMSF Adviser.
“We raised with [the ATO] the technical issue that if you put a deposit on a property, and you don’t have any borrowing in place, then technically the LRBAs are not met,” Mr Colley said.
“When you pay the loan off, there’s no loan existing because the property is then ungeared and technically that would have meant a breach of the in-house asset rules,” he added.
The draft instrument resolves this issue by allowing the property to remain in the related trust in these circumstances, without being in breach of the in-house asset rules, provided nothing else is done with the property, Mr Colley explained.
The change benefits SMSFs by reducing stamp duty implications and transaction costs since the property doesn’t have to be transferred unnecessarily, according to Mr Colley.
“For stamp duty, particularly in Queensland, the transfer of the property to the superannuation fund from the holding trust would have ended up in double stamp duty,” Mr Colley said.
AMP SMSF’s head of technical and policy Peter Burgess added that this amendment provides an “important resolution” to the debate over whether the acquirable asset must be transferred from the holding trust to the SMSF once the borrowing has been repaid.
“This amendment seeks to make it clear that the acquirable [asset] can remain in the holding trust in the circumstances outlined in the legislative instrument once the loan has been repaid without the SMSF potentially breaching the in-house asset provisions,” Mr Burgess told SMSF Adviser.
“Together with [Assistant Treasurer Arthur Sinodinos'] announcement on 14 December 2014 that the tax legislation will be amended to make it clear that an investor in an instalment warrant will be treated as the owner of the asset for income tax purposes, this measure provides important clarification and certainty for LRBA investors,” Mr Burgess added.
Submissions concerning the draft legislative instrument will close on 31 January 2014.